Investment

24.09.2015Keeping up or holding back? The regulation challenge for government

Australia’s new prime minister, Malcolm Turnbull, has announced what he calls a “21st-century government”. The Conversation continues its series focusing on what such a government should look like, looking at business regulation.

A 21st Century government needs 21st Century regulation. The key is not to predict the future. It is to have flexible rules and processes that do not lock us into a particular technology. It also means fighting the vested interests who will oppose change to protect their own profits.

Don’t we already have 21st Century regulation?

To see the problem look no further than Bitcoin. The banks are refusing to deal with Bitcoin traders. The traders claim that this is co-ordinated, anti-competitive conduct. This sounds likely and the competition regulator, the ACCC is investigating. The Australian Bankers Association, however, claims that the banks are simply following anti-money laundering rules. And given the impossibility of tracing Bitcoin flows, this sounds pretty reasonable as well.

Indeed, think of a new technology and there is probably a legal hurdle. Good laws can adapt to new technology. Bad laws lock out new technology.

Should we leave it to the regulators?

Sometimes regulators can solve the problems within the current laws. But this can lead to poor outcomes.

For example, in the UK in 2014, the Office of Fair Trade (OFT) had a dilemma. Online travel agents, like Expedia, require ‘most favoured customer’ status with hotels. A hotel cannot offer a cheaper price on its own website than the online agent can offer. The online agents argue that this stops consumers free-riding: using the agent to decide which hotel they want to stay at then booking directly with the hotel and not paying the agent’s commission. The hotels argue that it is anti-competitive. Why shouldn’t they be able to discount directly to customers? Both sides have a point.

So the OFT crafted a compromise. Hotels can discount, but only for repeat visitors who join a “club”. Membership of the club may be free, but consumers can only join after staying at least one night at the relevant hotel chain. Hotels cannot price below the online travel agents for consumers who are not in their club.

Like most compromises, this is likely to satisfy no-one. Frequent travellers will quickly become members of a variety of clubs, and they can then free-ride on the online agents. And the online agents can legally rip off consumers – but only once for any particular hotel chain!

If the rules are inadequate, we can’t just leave it to regulators to muddle along. Government needs to design better rules.

Give us some examples

Ride-sharing needs existing taxi laws to be changed. This is easier said than done as existing taxi-owners will fight to keep their profits.

Driverless trucks need modified road rules. Governments can work with logistics companies and technology firms to trial these vehicles. Night-time on the dual carriageway between Melbourne and Sydney seems a good place to start. And build up slowly, with the eventual aim of driverless linked trucks operating at high speed between Campbellfield and Campbelltown.

Credit card surcharging is not working, as the 2014 Financial Services Inquiry (FSI) recognised. Some surcharges are too high, some are too low and many merchants are reluctant to put on any surcharge at all despite the fees they pay when they accept your card.

The FSI suggested solution is to increase regulation. See recommendation 17. This is the wrong way to go.

We already have a solution. Australia was a world leader in direct charging for ATMs. Consumers are informed of any charge by the ATM and can continue or cancel as they choose.

Why not investigate the same solution for credit cards? If you use a credit card at a merchant and there is a fee, then you are informed electronically before you commit. The merchant sets the same price for everyone. It is up to the card company and your bank if they want to sting you. And if they do, you can swap to cash, EFTPOS or switch card providers.

The card companies and banks will oppose such reform. But if the Reserve Bank and federal government work together, then Australia can be a leader in the innovative use of technology to improve payments.

How does the 21st Century government go forward?

To adopt 21st Century regulation, governments need to work with regulators to craft new solutions.

Sometimes the current law may work. For example, if the banks that are banning Bitcoin have a legitimate problem then the law allows them to “seek authorisation” and debate the costs and benefits before the ACCC.

Sometimes solutions can be modified from other industries or countries. Direct credit card charging is an example.